Decoding the Bali Fintech Agenda

Fintech a.k.a Financial Technologies – and blockchain in particular – has the potential to support growth and poverty reduction by strengthening financial development, inclusion, and efficiency. But, the fact that these new technologies will continue to develop over the same timeframe as the implementation of the Paris Agreement and Sustainable Development Goals (SDGs) and at the same time it may pose risks to consumers and investors and, more broadly, to financial stability and integrity. The Governments of member states and their respective central banking institutions are keen to foster fintech’s potential benefits and to mitigate those possible risks.

In response to these questions, on October 11, 2018, the International Monetary Fund (IMF) and the World Bank staff presented the Bali Fintech Agenda, which has been summarized in a research-cum-policy paper - under which, many international and regional groupings are now examining various aspects of fintech, in line with their respective mandates.

The Proposal

The Bali Fintech Agenda is "a set of 12 policy elements aimed at helping member countries to harness the benefits and opportunities of rapid advances in financial technology that are transforming the provision of banking services, while at the same time managing the inherent risks."

"There are an estimated 1.7 billion adults in the world without access to financial services," said IMF Managing Director Christine Lagarde. "Fintech can have a major social and economic impact for them and across the membership in general. All countries are trying to reap these benefits, while also mitigating the risks. We need greater international cooperation to achieve that and to make sure the fintech revolution benefits the many and not just the few. This Agenda provides a useful framework for countries to assess their policy options and adapt them to their own circumstances and priorities."

"The Bali Fintech Agenda provides a framework to support the Sustainable Development Goals, particularly in low-income countries, where access to financial services is low," World Bank Group President Jim Yong Kim said. "Countries are demanding deeper access to financial markets, and the World Bank Group will focus on delivering fintech solutions that enhance financial services, mitigate risks, and achieve stable, inclusive economic growth."

The 12 policy elements are as follows;

1. Embrace the Promise of Fintech with its far-reaching social and economic impact, particularly in low-income countries, small states, and for the underserved, and prepare to capture its possible wide-ranging benefits, including; increasing access to financial services and financial inclusion; deepening financial markets; and improving cross-border payments and remittance transfer systems. Reaping these benefits requires preparation, strengthening of institutional capacity, expanding outreach to stakeholders, and adopting a cross-agency approach involving relevant ministries and agencies.

2. Enable New Technologies to Enhance Financial Service Provision by facilitating foundational infrastructures, fostering their open and affordable access, and ensuring a conducive policy environment. Foundational infrastructures include telecommunications, along with digital and financial infrastructures (such as broadband internet, mobile data services, data repositories, and payment and settlement services). The infrastructures should enable efficient data collection, processing, and transmission, which are central to fintech advances.

3. Reinforce Competition and Commitment to Open, Free, and Contestable Markets to ensure a level playing field and to promote innovation, consumer choice, and access to high-quality financial services. The successful and large-scale adoption of technology would be facilitated by an enabling policy framework regardless of the market participant, underlying technology, or method by which the service is provided. Policymakers should address the risks of market concentration and should foster standardization, interoperability, and fair-and-transparent access to key infrastructures.

4. Foster Fintech to Promote Financial Inclusion and Develop Financial Markets by overcoming challenges related to the reach, customer information, and commercial viability, and by improving infrastructure. The evolving digital economy together with effective supervision are essential in overcoming long-standing barriers to financial inclusion across a broad range of financial services and in enabling developing countries to leverage promising new pathways for economic and financial development to support growth and alleviate poverty. Examples include expanding access to finance while reducing costs, providing new ways to raise funding, enabling new information services to assess risks, and spurring new businesses. To achieve these goals, fintech issues should be part of a national inclusion and financial and digital literacy strategies, while fostering knowledge-sharing between public- and private-sector players, civil society, and other stakeholders.

5. Monitor Developments Closely to Deepen Understanding of Evolving Financial Systems to support the formulation of policies that foster the benefits of fintech and mitigate potential risks. The rapid pace of fintech will necessitate improvements and possible extensions in the reach of monitoring frameworks to support public-policy goals and to avoid disruptions to the financial system. Information-sharing and exchange would support improved monitoring. Achieving these objectives brings out the importance of continuous monitoring — including by maintaining an ongoing dialogue with the industry, both innovators and incumbents — to identify emerging opportunities and risks, and to facilitate the timely formation of policy responses.

6. Adapt Regulatory Framework and Supervisory Practices for Orderly Development and Stability of the Financial System and facilitate the safe entry of new products, activities, and intermediaries; sustain trust and confidence, and respond to risks. Many fintech risks might be addressed by existing regulatory frameworks. However, new issues may arise from new firms, products, and activities that lie outside the current regulatory perimeter. This may require the modification and adaptation of regulatory frameworks to contain risks of arbitrage while recognizing that regulation should remain proportionate to the risks. Holistic policy responses may be needed at the national level, building on guidance provided by standard-setting bodies.

7. Safeguard the Integrity of Financial Systems by identifying, understanding, assessing, and mitigating the risks of criminal misuse of fintech, and by using technologies that strengthen compliance with anti-money laundering and combating the financing of terrorism (AML/CFT) measures. While fintech innovation generally supports legitimate goals, some innovations may enable users to evade current controls for criminal ends, thus posing a threat to financial integrity. Country responses have varied considerably; but, in all cases, it is important to strengthen AML/CFT compliance and monitoring, including by using technology (Regtech and Suptech solutions) to support regulatory compliance and supervision.

8. Modernize Legal Frameworks to Provide an Enabling Legal Landscape with greater legal clarity and certainty regarding key aspects of fintech activities. Sound legal frameworks support trust and reliability in financial products and services. This is undermined, however, where legal frameworks fail to keep pace with fintech innovation and evolving global financial markets. An enabling legal framework can be fashioned by having clear and predictable legal rules that accommodate technological change, tailored to national circumstances, particularly in areas such as contracts, data ownership, insolvency, resolution, and payments.

9. Ensure the Stability of Domestic Monetary and Financial Systems by considering the implications of fintech innovations to central banking services and market structure, while: safeguarding financial stability; expanding, if needed, safety nets; and ensuring effective monetary policy transmission. Fintech could transform the financial markets through which monetary policy actions are transmitted and could challenge the conduct of monetary policy as well as redefine central banks’ role as lenders of last resort. On the other hand, fintech could help central banks improve their

services, including potentially issuing digital currency, and expanding access to and improving the resilience of payments services.

10. Develop Robust Financial and Data Infrastructure to Sustain Fintech Benefits that are resilient to disruptions –– including from cyber-attacks –– and that support trust and confidence in the financial system by protecting the integrity of data and financial services. Developing such robust infrastructure raises a broad spectrum of issues that are relevant not only to the financial sector but also to the digital economy at large, including data ownership, protection, and privacy, cybersecurity, operational and concentration risks, and consumer protection.

11. Encourage International Cooperation and Information-Sharing across the global regulatory community to share knowledge, experience, and best practices to support an effective regulatory framework. As new technologies increasingly operate across borders, international cooperation is essential to ensure effective policy responses to foster opportunities and to limit risks that could arise from divergence in regulatory frameworks. Sharing experiences and best practices with the private sector and with the public at large would help catalyze discussion on the most effective regulatory response, considering country circumstances, and to build a global consensus. The IMF and World Bank can help in facilitating the global dialogue and information-sharing.

12. Enhance Collective Surveillance of the International Monetary and Financial System and the adaptation and development of policies to support inclusive global growth, poverty alleviation, and international financial stability in an environment of rapid change. Fintech is blurring financial boundaries — both institutionally and geographically — potentially amplifying interconnectedness, spillovers, and capital flow volatility. These developments could lead to increased multipolarity and interconnectedness of the global financial system, potentially affecting the balance of risks for global financial stability. The IMF and World Bank could help in improving collective surveillance and assist member countries via capacity building, in collaboration with other international bodies.

Points to be Kept in Mind

Use of technology in finance is not new, but rather the novel application of a number of technologies
in combination makes the current wave of disruption unlike any we have seen before in the global financial sector. From mobile payment platforms to high-frequency trading (HFT), and from crowdfunding and virtual currencies to blockchain - Fintech, is a collection of forceful innovations which will threaten the viability of today’s financial sector business models, and indeed the effectiveness of current policies, regulations, and norms that have shaped modern finance.

According to Dr. Bejoy Das Gupta, Adjunct Professor, Maxwell School of Syracuse University, "The risks (arising from Fintech) call for an appropriate supervisory and regulatory approach at the country level, backed by international cooperation to address cross-border concerns. Policy needs to strike the right balance between not stifling innovation while guarding against financial stability risks. Regulatory sandboxes, incubators, and accelerators can be used to test new products and technologies, but bringing fintech under strengthened, effective and unified supervisory oversight is a priority. In this regard, regulation/licensing and risk management should be based on activity rather than the type of institution for a level playing field for financial service providers. Appropriate rules also need to be set for data protection, privacy, and technology, along with cybersecurity protection and reporting standards."
Getting the policymaking architecture right is important, but, getting it executed is all-together a different ball game. As the "Agenda" itself says, "Reaping these benefits requires… strengthening of institutional capacity, expanding outreach to stakeholders, and adopting a cross-agency approach involving relevant ministries and agencies."